Play Time or Pay Day?

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Now that most companies have implemented the initial effective provisions of the Patient Protection and Affordable Care Act, it may soon be time to start thinking about a key element of the health-care reform law that’s not slated to take effect until 2014.

That year, under a provision known colloquially as pay or play, employers must decide whether to offer health insurance to their workers or pay a penalty that, for most, will be $2,000 per full-time employee and equivalent, over and above 30 full-timers. If the wrong decision were made, it could outweigh the combined costs of all the other factors associated with reform, health-care experts say.

But is there any reason to be looking at the issue so far in advance? Yes, some say. While procrastination is a common trait of people and organizations alike, as usual there is a risk in waiting too long.

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“With all the stuff you get lost in while running and growing a business, you might think, ‘Hey, this thing is years away. I’ll worry about it in the fall of 2013,'” says Kevin O’Shaughnessy, CFO of Service Repair Solutions, a provider of automotive-repair information. “But you really can’t. It’s better to be proactive and have a plan than to get caught flat-footed and have to be reactive.”

While 2014 is three years away, negotiations with health-care providers for plan years starting then likely will take place in 2013. Also, the pay-or-play decision may have implications beyond health care for the design of “total rewards” programs that incorporate anything used to attract, motivate, and retain employees.

“Depending on the strategic pathway pursued, it could take two or more years to effectively implement the decision,” says Ron Fontanetta, leader of the health and group benefits practice at Towers Watson. Companies are well served to begin the dialogue and planning by the end of this year, he adds.

Some companies are already doing some preliminary financial modeling to get an early idea of whether they will come out ahead or behind by continuing to offer health benefits, says Ed Bray, director of compliance for Burnham Benefits Insurance Services. But he’ll be surprised if many employers opt to drop health-care coverage, because the modeling, done correctly, should take into account more than just the raw costs of providing health insurance and the per-employee penalty for not providing it.

For example, employers that opt to “pay” will lose the tax deduction allowed for the employer-paid portion of health-care program costs. Also, they will owe more to the government for FICA taxes and workers’ compensation. Why? Because without health-insurance premiums deducted pretax from their paychecks, employees will have greater taxable income. That means their FICA and workers’ comp obligations will increase, and so will those of the employer, which must match each employee’s payments.

“Over the past year I’ve talked to many CFOs about pay or play, and more often than not they’ve said that the annual penalty is less than what they’re paying now,” Bray says. “But when you do all the math, those numbers can get very close — certainly close enough so you’ll want to look long and hard at the potential ramifications, like taking a competitive hit to your work force, before deciding not to offer health insurance.”

Fontanetta agrees that few companies are likely to dump their health-care coverage in 2014 — after all, they could do that now with no penalty — but suggested that the situation could change by, say, 2016. Many employers, he says, will wait to “take the pulse” of the state insurance exchanges required under the reform law, currently targeted to be rolled out in 2014 as well. They will evaluate such factors as how effective the exchanges are, how the insurance is priced, and the range of options offered.

“We expect it will take a couple of years after the exchanges are operable for employers to get comfortable with what the landscape looks like,” Fontanetta says. But in the short or medium term, there is the possibility of solutions that are a mix of “pay” and “play.” For example, an employer might decide to pay for employees’ health insurance but reduce or eliminate coverage for dependents.

For many employers, the industry they’re in and the demographic and health profiles of their employees may be major factors in the decision. A sector with high turnover, like retail, may conclude that the exchanges are the better way. For utilities, with older, harder-to-replace workforces, retaining health insurance may be vitally important.

Meanwhile, even companies that offer health-care programs could be subject to stiff financial penalties. Under the reform law, employees of organizations with poor-quality insurance could qualify for a tax credit to subsidize their own purchase of insurance. In order for such companies to avoid paying a government penalty (the lesser of $3,000 annually per full-time employee who gets such a tax credit, or $2,000 annually for every full-time worker), an employer must do three things.

First, it must offer “minimum essential benefits,” although the government has not yet defined that. Second, the plan must cover at least 60% of the costs of the benefits, with employees paying no more than 40%.

Third, an employee’s share of the premium cannot exceed 9.5% of his or her household income, though an employer obviously wouldn’t know the income of an employee’s spouse. Rather, the employee likely would apply for the tax credit to the federal government, which then would notify the employer. That requirement may be “worked on a bit,” suggests Bray, because “it just doesn’t seem logical or fair to employers.”

That brings up what may be the most salient factor of all: anything or everything could change with regard to pay or play — or for that matter with the reform law as a whole, right down to a possible repeal, depending on how well the Republicans do in the 2012 elections. And that might even provide an acceptable rationale for procrastination. “Not a lot of clients are doing anything yet [to get ready for 2014],” says Jeff Mamorsky, co-chair of the benefits practice at the big law firm Greenberg Traurig.

(Click here to access a recent CFO webcast on the cost impacts of health-care reform.)